Note: This document may not always reflect the actual appropriations determined by Congress. Final budget allocations for USAID's programs are not determined until after passage of an appropriations bill and preparation of the Operating Year Budget (OYB).
EUROPE AND THE NEW INDEPENDENT STATES
FY 1998 Assistance to Central Europe . . . . . . . . . . . . . . . . . $492,000,000 FY 1998 Assistance to the New Independent States . . . . . . . . . . . . . . . . . $900,000,000 FY 1998 Economic Support Fund . . . . . . . . . . . . . . . . . $84,600,000 FY 1998 Development Assistance Fund . . . . . . . . . . . . . . . . . $4,000,000 FY 1998 P.L. 480 Title II . . . . . . . . . . . . . . . . . $11,407,000 INTRODUCTION
The central national security goal of the United States is to help establish conditions around the world which will prevent U.S. involvement in war while preserving our freedom. That is why the incorporation of the former Eastern bloc nations of Central Europe and the new independent states (NIS) of the former Soviet Union into the ranks of democracy and free market economies will continue to be one of our highest foreign assistance priorities.Since the overthrow of communist regimes in Europe and the dissolution of the Soviet Union, the U.S. Government has been helping the Central European and NIS countries make the transition from centralized, authoritarian control to sovereign nations governed on the basis of democratic, free-market principles. The political, economic and security benefits of this transition are as enormous to the people of the United States as they are to the people of Central Europe and the former Soviet Union. Overall U.S. policy in this region is focused on establishing normal, enduring and productive relations with each country and on encouraging such relations among them as well as with the other members of the international community. These relations must be based on the mutual recognition of reasonable security interests, the maintenance of normal economic relations, and the free movement of people, goods and ideas. The U.S. assistance effort in Central Europe and the NIS is intended to move these countries into a normal trade and security relationship with the United States and Europe. Programs are designed to emphasize cooperation, exchange and cross-national linkages, rather than the typical donor-recipient relationships found in more traditional assistance programs.
In just eight years in Central Europe and five in the NIS, the U.S. assistance program has contributed significantly to the development of market democracies. Democracy has taken root in most of Central Europe, and the private sector now dominates economic activity in most states there. Historic changes have occurred in the NIS from development of independent media and grass-roots organizations to massive private sector ownership and entrepreneurship. A significant start has been made in creating the institutions and systems that permit the rule of law and nurture private initiative. The U.S. Government's assistance programs are making a positive impact. It is crucial that the United States now helps these nations consolidate these changes to make them irreversible and increase emphasis on trade, investment, and other linkages typical of nations that expect to share a peaceful and prosperous common future. Accordingly, the Administration is proposing a Partnership for Freedom initiative beginning in FY 1998 that will reorient the assistance program, initially for Russia and then for the other NIS, toward longer-term and more cooperative programs to spur economic growth and develop lasting links.
U.S. assistance programs in Europe and the New Independent States (ENI) are uniquely structured to meet U.S. foreign policy challenges. Assistance programs are overseen by two legislatively mandated State Department coordinators, one for the New Independent States under the FREEDOM Support Act (FSA) and the other for Central Europe under the Support for East European Democracy (SEED) Act. This oversight is intended to ensure coordination of policy and development decisions in the region, and to promote synergy among U.S. Government assistance programs.
USAID has managed the largest portion by far of U.S. assistance to the region. In addition, a dozen other U.S. Government agencies implement programs financed through the FSA or SEED resources. A major element of assistance to Russia, the Gore-Chernomyrdin Commission, is under the directleadership of the Vice President. A parallel structure is the Gore-Kuchma Commission which guides U.S. programs in Ukraine. As the Partnership for Freedom program unfolds, USAID's traditional technical assistance programs will diminish in countries which have substantially achieved the basic democratic market transition. New emphasis on trade and investment and cooperative activities to promote democracy will sustain the transition and encourage lasting ties.
U.S. NATIONAL INTERESTS AND PRIORITIES
The primary goal of U.S. assistance to the ENI region is to promote American security by helping integrate the countries of Central Europe and the former Soviet Union into the community of market-oriented democratic nations with a significant stake in developing normal and productive international relationships. This process, now well underway, has several tangible benefits.Peace Dividend. The end of the East-West rivalry has freed up substantial resources for investment here at home. These savings are being applied to deficit reduction and to vital needs -- crime prevention, health, education, environment -- at home.
Democratic Expansion. In Russia in 1996, President Boris Yeltsin defeated communist and right-wing parties in an election deemed "free and fair" by international observers. Significantly, defeated parties and candidates in Russia and throughout the region accepted the election results, including the communist party, which had seized power through force and held it for over 75 years. At the grassroots level, hundreds of active nongovernmental organizations (NGOs), including free trade unions, environmental organizations and human rights monitors, guard their respective interests in a region where the NGO sector didn't exist just a few years ago. A free press and independent media have provided myriad alternatives to the government-controlled media of the recent past.
New market development. U.S. trade with the region has more than doubled in the last decade and has the potential to multiply several fold in the coming years, translating into well-paying, export-related jobs. Private U.S. investment, previously non-existent, is well over $10 billion. During the Cold War, this market of 400 million people was closed to U.S. business. Today it is open and anxious to expand trade.
Regional Security and Cooperation. The countries of Central Europe and the former Soviet Union are cooperating to build new security arrangements to promote peace and economic prosperity and are working closely with the United States to address regional and global problems. The current discussion over the enlargement of the North Atlantic Treaty Organization to include states in the region points to the progress that has been made in a few short years. Poland, for instance, for which the Warsaw Pact was named, is now high on the list to join NATO, the western democratic alliance.
Peace in Bosnia. The Dayton Accords present a unique opportunity to help build durable peace in Bosnia-Herzegovina. The U.S. Government, in concert with our NATO allies and a large international donor community is committed to stabilizing the post-war situation, providing a foundation for economic revitalization and assisting the establishment of effective political and constitutional institutions. As the lead U.S. agency in Bosnia, USAID is also committed to helping meet remaining humanitarian needs to support reconstruction finance, municipal infrastructure and services, and to provide economic and democratic technical assistance programs.
USAID IS ACHIEVING RESULTS
The USAID program pursues three strategic goals in this region: economic restructuring, democratic transition and social stabilization. Beginning in FY 1998 a new goal related to economic growth -- increased trade and investment -- will apply to the NIS countries that have made the most progress in restructuring their economies.Economic Restructuring
Since 1989, USAID programs have contributed to sweeping economic changes, including mass privatization, land privatization, fiscal reform, development of modern banking systems and energy sector restructuring. Establishment of private property rights and the growth of entrepreneurship have given ordinary citizens a stake in the new economic system. With USAID assistance, most countries have made systemic changes such as creation of laws and institutions to permit private business, as well as specific changes in practices such as adopting Western accounting principles and banking practices. Many are in the process of gaining accession to the World Trade Organization and improving their trade prospects. In Central Europe, the fruits of reform are seen in the encouraging macroeconomic performance of most countries. In that region, economic growth averaged 5% in 1995, up from 4% the previous year. In the NIS, significant progress has been made towards price stability, a precursor to higher economic growth. Furthermore, the severe output declines experienced by most NIS countries since the collapse of the Soviet Union appear to have bottomed out. Armenia, Georgia and Kyrgyzstan have already returned to positive growth. Most of the rest, including Russia, are expected to follow in 1997.USAID has helped to create a private sector.
USAID's assistance to the private sector begins with the landmark privatization process. From mass privatization in Russia to small-scale privatization in Kazakstan to analyzing and negotiating the sale of large state enterprises in Central Europe, USAID has been at the forefront.From a regional average of about 10% in 1989, the private sector now generates over 50% of gross domestic product (GDP) in Central Europe (less in the NIS). (See figure 1).
USAID has been instrumental in moving privatization forward in the NIS. For example, after a slow start, some 400 companies a month are entering the auction process in Ukraine. In Moldova, people are owning their homes for the first time. Outside of the cities, USAID's collective farm restructuring project has proven so successful the Moldovan Government has requested its replication in all 40 districts. In Kyrgyzstan, demonopolization work has led to the creation of new businesses in transport and wholesale marketing. Polls show that 70% of the population now supports privatization, representing a dramatic, positive shift in opinion.
Where privatization has encountered difficulties, USAID has persevered. In Bulgaria, when central-level privatization stalled, USAID reoriented its assistance program to focus on reform-minded municipalities with the goal of replicating local successes throughout the country. USAID's assistance to Albania's successful land privatization now is supported by a law allowing for the buying and selling of land. USAID took the lead in implementing a property registration system to provide secure tenure and to establish the basis for a land market. Over 256,000 final titles have been issued. This will permit the consolidation of fragmented parcels into economically viable holdings and will improve access to credit for the economically disadvantaged, including women.
Not only did USAID help propel privatization forward, but it has extended technical assistance, training, and credit to the mushrooming small business sector, which has been the source of most of the new job opportunities. Support for business associations strengthens the fledgling private sector and provides advocates for legal and regulatory reforms that can aid business growth. Throughout the region USAID has also been active in the provision of credit facilities for small businesses using Enterprise Funds and other financing mechanisms. In Kyrgyzstan, USAID's microfinance has been provided to clients (75% of whom are women) who otherwise would not have been able to secure loans.
USAID has helped lay the foundation for a market-oriented financial sector.
USAID's work in the financial sector supports an essential element needed for the development of a flourishing, sustainable market-oriented economy. In Poland, Warsaw is one of the most exciting financial centers among emerging markets, and stock market and bank transactions are now more efficient in transferring resources to the most productive uses. Strengthened central bank supervision provides the bedrock for often fragile financial sectors and improves public confidence in financial institutions. For example, USAID's bank supervision assistance to the Bank of Lithuania provided an invaluable service in maintaining the integrity of the banking system when major problems at ten banks surfaced in late 1995. Assistance to the Bank of Armenia has enabled it to restructure completely, to enforce bank laws and regulations, and to install an electronic payments system. Similarly in Ukraine, the central bank has taken significant steps toward establishing a sound banking sector, which now boasts a fully functional Interbank Payment System.
USAID's collateral law reform assistance has been particularly beneficial to the banking sector. Banks are now able to provide asset-based lending so that commercial lending for small businesses and mortgage lending for potential homeowners are increasing. A major recent success was the passage of the Polish collateral law in December 1996.
To support its financial sector work USAID helped develop a range of institutional and legal functions essential for an operational capital market, including stock exchanges, clearing and settlement organizations, share registries and depositories, and securities commissions. Several legal reform programs specifically addressing capital markets issues, including corporate governance and shareholder rights, have been implemented and have produced favorable results. In Russia, capital markets are up and running, and regulatory mechanisms are in place. Kazakstan opened its first private stock exchange in April 1995. This landmark development has proved its worth in unexpected ways. In October 1995, the exchange became a forum for auctioning off government-owned shares for cash.
In Central Europe, progress in capital markets has been rapid. Hungary's stock exchange, with 44 stocks listed, is Central Europe's most liquid market. Romania approved a Securities and Exchange law, created a new National Securities Commission and opened the Bucharest Stock Exchange in June 1995. Over-the-counter electronic transactions have begun. The Tirana Stock Exchange opened in May 1996 in Albania, providing a venue for trading in government treasury bills, bonds and privatization vouchers. The Bratislava Stock Exchange in Slovakia has grown steadily in both listings and in trading volumes, which rose from $525,000 in 1993 to almost $1.3 billion in 1995.
USAID has helped governments improve finances.
Governments throughout the region have faced tremendous fiscal pressures stemming from the breakdown of command-based economies. These problems have tended to be more acute in the NIS, where USAID advisors have made major contributions in the fiscal policy and tax administration areas. Through USAID assistance, Kazakstan's new tax code was introduced in June 1995. Regarded as the most efficient and equitable code to be adopted in any former Soviet republic, it is serving as a model for draft codes elsewhere. A new tax code in Uzbekistan awaits enactment by Congress. A budget (state financial procedures) law and a treasury law are almost completed. With USAID advisoryassistance, Kyrgyzstan leads the Asian Republics in economic stabilization. The Kyrgyz som is the most stable currency in the region, at times appreciating against the dollar. Through cuts in production and consumption subsidies, and short-term cash management measures, the Ministry of Finance has reduced the budget deficit from about 17% of GDP in 1992 to a projected 5.5% in 1996.
USAID has helped make the energy sector more efficient and the environment cleaner.
One of USAID's main objectives in its economic restructuring program is to change the patterns of energy use and intensity, so as to promote energy efficiency while helping to protect people and improve the environment. Appropriate energy costs are also key to a market-oriented economy, and USAID's energy program has contributed to improved energy-pricing policies. USAID's success is apparent in many ways throughout the region. In Estonia, U.S. assistance has helped build institutional capacities to strengthen environmental analysis and decision-making, has involved local governments and citizens in the process, and demonstrated that sound environmental practices can also be commercially profitable. USAID-supported waste minimization projects helped 18 Polish companies achieve annual savings of $7.2 million, while protecting the environment from further degradation. Improved environmental technologies are providing cost savings to Hungarian industrial plants. Nuclear safety has been improved at Ignalina Power Plant in Lithuania with USAID assistance, and the regional electricity grid has been upgraded. In Slovakia, major enterprises are adopting clean technology, resulting in substantial reductions in pollution. In Ukraine, power sector restructuring has progressed beyond that of any other nation in the former Soviet Union. The wholesale electricity market began operation in April 1996 under the structure of an independent regulator. Ukraine's eight regional monopolies which controlled power generation, transmission and distribution were broken up into 33 joint stock companies. Efforts are well under way in Armenia to de-monopolize the electricity sector, rationalize energy pricing, and improve tariff collection. In Georgia, restructuring of the energy sector has resulted in the sale of a number of hydro power plants to private investors. Similarly in Kazakstan, the electricity sector has been de-monopolized and foreign strategic investors are in the process of privatizing major power plants. U.S. environmental expertise is also leveraging large amounts of other donor funding. In Russia, the World Bank has asked for U.S. environmental advisers to help it co-finance $200 million in pollution abatement loans.
Democratic Transition
Democratic governance is critical to these formerly authoritarian states. Under communist rule, there was widespread abuse of civil and human rights and little access to information or citizen participation in political decision-making. Now free and fair elections are being held across the region, governments are being decentralized, independent media access is making information available and increasing government accountability, and NGOs are attracting support and influencing policy as they help articulate citizens' needs. Indeed, democracy-building leads the reform process in many countries. Drawing from Freedom House assessments, several countries in Central Europe appear to have achieved democratic freedoms roughly on a par with Western European countries. (See figure 2).
USAID's democracy and governance programs help make recipient governments transparent and responsive to the public by creating checks and balances against the arbitrary power of political leadership and the state bureaucracy. They also create the legal and informational environments which facilitate community initiative outside government and protect individual rights. Increasingly, USAID's support for the development of commercial laws provides the environment necessary for individuals to enjoy economic freedom on a par with newly acquired personal freedom.
USAID has helped to promote citizen participation.
In FY 1996, Armenia, Azerbaijan, Kyrgyzstan, Kazakstan and Russia received election-related training and technical assistance which complemented ongoing long-term political process programs. USAID grantees organized extensive voter and civic education programs. The fact that an increasing numberof political parties, candidates, independent trade unions, and civic organizations participated in political processes was an encouraging sign that democratic reform was progressing in the NIS. The success of the Russian presidential elections and the continued evolution of participatory democracy in that country support the long-term promise for a blossoming of democracy throughout the region. In Lithuania, for example, the results of recent elections have demonstrated the maturity of the political process in that country as voters gave the independence reform party a majority of seats in the parliament after voting them out of power in the previous national elections.
In 1991, only a handful of NGOs operated in Russia; now there are more than 40,000 registered there as a result of USAID's encouragement of legislation supporting NGO formation. USAID has assisted numerous activities intended to support citizen and NGO participation in community and national life. Activities include legal assistance, strengthening and networking of NGOs, education reform programs in schools and universities, and support to women's, youth, environmental, charitable, and civic groups. In the NIS, assistance provided by U.S. PVOs is increasing the technical and institutional capacity of local groups through leadership training, fundraising and networking, and is providing seed grants to implement small projects. For example, in the Russian Far East, support for local environmental NGOs has helped to give them a formal role in local resource management decision-making.
Civil society is emerging in the ENI countries, but the public needs better access to multiple independent sources of information and more secure freedoms to take individual and community initiative. Independent press and electronic media have been established despite continuing or even increased control by some governments. USAID funds media resource centers, journalist exchanges, journalism programs, and technical assistance for media outlets. Many viewers in the NIS were able to get objective news of the Chechnya conflict only from a television news network developed by a USAID grantee.
USAID has helped to establish the rule of law.
Parliamentary exchanges, training, and technical assistance have been instrumental in orienting many ENI parliaments to enact economic and political reforms, civil liberties laws, and new constitutions. New or modified criminal and civil codes have been reviewed or adopted in Albania, Armenia, the Czech Republic, the Former Yugoslav Republic of Macedonia, Georgia, Lithuania and Slovakia. Russia's civil code is a major example of legislation which lays the foundation for the development of commercial laws that will promote a market economy. The code guarantees both freedom of contract and protection of private property and will improve confidence in market institutions in an environment where financial crime is a serious problem. In June 1996, the Ukrainian parliament ratified its first post-Soviet constitution, receiving considerable input from USAID grantees in terms of material, public debate, and media coverage throughout the development and adoption process.
USAID has also worked with judges throughout the ENI region in forming associations, drafting codes of judicial ethics, and lobbying for judicial independence. Training in new legislation has been providedthrough U.S. and European experts. Increasingly emphasis is being placed on the development of indigenous expertise. For example, a judicial training center has been established in Latvia, while the Bulgarian judges association has been weaned from USAID assistance and is providing continuing legal education to judges throughout the country. Similar work is being done with attorneys in the region in order to increase skills and competence throughout the legal profession.
USAID has helped to strengthen local governments.
USAID's public administration, and housing and urban development assistance has strengthened local governments. For example, newly elected mayors in the Czech Republic, Poland, and Slovakia have become more effective and independent by using USAID assistance to make their professional organizations self-sufficient. An association of reform-minded Bulgarian mayors provided input on amendments to the local government law. In Bulgaria, USAID is fully committed to developing the New Partnerships Initiative (NPI) announced by Vice President Gore in March 1995. The NPI promotes governmental and nongovernmental collaboration to enhance grass-roots capacity for solving local problems. NPI investments are also taking hold in Romania and Russia.
USAID has helped municipal governments in several NIS countries become more transparent, accountable and responsive. The Municipal Finance and Management (MFM) program has completed pilot activities with governments of eight demonstration cities in the region, with the aim of improving management, financial practices and service delivery. USAID efforts have also focused on the financial sector. For example, the USAID-supported Association of Polish Cities and Union of Polish Metropolitan cities positively influenced national legislation, making municipal bonds more feasible and the allocation of housing subsidies more equitable. Similarly, a new municipal debt market created in the Czech Republic allows municipalities and commercial banks to finance environmental infrastructure projects. Forty environmental and energy-related municipal infrastructure projects, funded with a housing guaranty loan, directly benefited more than 35,000 households and 124,000 people in 26 municipalities.
Social Stabilization
When social dislocation is ignored or inadequately addressed, citizens suffer. Citizens associate their plight with reforms, and in some cases have used newly acquired voting rights to elect politicians who exploit these concerns. Neither USAID nor other donors can finance social "safety nets," but the agency can provide targeted technical assistance to strengthen the countries' own social protection systems. For example, helping Ukraine, Russia and Slovakia to move away from virtually free housing for all to market-based rents and maintenance fees has improved the quality of housing while freeing municipalities' resources for targeted subsidies for the most vulnerable groups. In areas affected by civil strife, USAID has played a major role in alleviating suffering, particularly in the Caucasus, Tajikistan and Bosnia.
USAID has helped to balance fiscal responsibility with aid to the most vulnerable.
Central governments can no longer afford to subsidize populations to the same degree as before. USAID helps to identify the most needy in society so that governments can provide for those for whom care is a necessity. With USAID support, the Ukrainian Government introduced targeted, means-tested subsidies for housing and utilities, reaching over 3.2 million families. This enabled price increases for housing and communal services, resulting in an estimated net savings of $600 million for 1995. In Armenia, USAID funded the creation of a computer database, which verifies household vulnerability. International donors also use the information to target those most in need of humanitarian interventions.
USAID realizes that, as humanitarian crises in the Caucasus and elsewhere abate, the needs of refugees and other vulnerable groups move away from food aid, shelter, and healthcare towards themeans to develop self-sufficiency. Already hundreds of unemployed workers in Armenia have benefited from USAID-supported jobs in agriculture and light industries.
USAID has moved to shore-up health care systems as it has become more difficult for the state to provide social benefits. USAID's strategy promotes efficient, cost-effective health care systems by supporting systemic improvements in financing, payment, service delivery, management, and quality control. In the Czech Republic, USAID has worked to identify weaknesses in the health system. Reproductive health programs are being funded in Central Asia, Moldova, Russia, Ukraine, Albania, and Romania. Preliminary data from the NIS indicate that service improvements have resulted in reduced abortion rates and increased contraceptive use. Health partnerships between U.S. and ENI medical institutions are making inroads into maternal mortality, an area traditionally neglected in the region. The Central Asian republics are now reported to be polio-free as a result of USAID immunization programs. Also in Central Asia, the USAID- supported Aral Sea initiative will ultimately provide potable water to over a million people and a public health program to some 1.5 million.
PROGRAM AND MANAGEMENT CHALLENGES
Managing for Results in the ENI Region
Since the inception of U.S. assistance to Central Europe and NIS, USAID has envisioned these programs as efforts intended to jump start the process of political and economic reform. The aim has been to help move the countries of the region far enough along the road to becoming market-based democracies that they can enter into normal political and economic relations with other countries and complete the journey on their own. In response to the programmatic and management implications of this strategy, USAID developed a results-oriented monitoring system which enables it to track both the impact of U.S. assistance programs (program impact monitoring), as well as the more general macro-level progress of the countries (country progress monitoring) to determine the extent to which countries are making their transition.
USAID has made exceptional progress during the last two years in designing and implementing tools to monitor program impact. In that time, USAID developed a strategic framework for assistance to the ENI region and established concrete strategic objectives for all country programs. Through a collaborative process with USAID development partners, field missions defined sets of results, performance indicators and targets for measuring progress against the achievement of strategic objectives. With these tools in place, USAID is systematically incorporating performance information into program reviews, planning and decision-making.
Country progress monitoring examines macroeconomic performance, democracy and governance, and social sector data to help determine whether continued assistance is necessary or justified. This analysis is conducted annually and shared with the State Department-based Coordinators for U.S. Assistance for Central Europe and NIS. In combination with other variables, this information helps form the basis for country-level resource requests as well as decisions on country graduation from U.S. assistance.
By managing for results, USAID has confirmed that many of the countries in the region are on track with their reforms, although there is still work to be done. The Agency has also recognized that some countries -- such as Estonia, Czech Republic and Slovenia -- are on their way to a successful transition and that cessation of U.S. assistance will not jeopardize it. On the other hand, countries like Belarus and Turkmenistan are making so little progress that the Agency has chosen to limit transition assistance until it can be better used. Still others, such as Albania and the Central Asian Republics, seem to be facing longer-term development challenges and need to be viewed as potential candidates for traditional sustainable development assistance.
The Remaining Challenge -- Sustaining the Transition and Promoting Lasting Ties
As we look toward reducing U.S. assistance in Central Europe, USAID will stress the sustainability of the reforms and institutional changes which have been put in place thus far. In the northern tier countries, where progress has been most rapid, there remains the need to consolidate, deepen and expand the transformation. For example, both Poland and Hungary have demonstrated that although overall country progress indicators are strong, the degree of restructuring is uneven among geographic regions within each country. Programs, between now and closeout of U.S. assistance, will help to consolidate reforms at the local level, push transition beyond the capital and a few key regions, and concentrate on enhancing sustainability of key activities after U.S. Government assistance ends. In Central Europe's southern tier, where economic and political change has much farther to go, there is still a need to put some of the more fundamental changes in place, as well as to ensure the irreversibility of those reforms.
Progress in the NIS has been slower than in Central Europe as shown in the comparative ratings of economic and democratic performance in Figure 3. European Bank for Reconstruction and Development (EBRD) ratings of macroeconomic policy in the NIS and in Central and Eastern Europe show almost all the NIS countries behind Central Europe in areas such as privatization policy, price liberalization, financial sector reform, and reform of the legal and regulatory regime confronting businesses. Only Russia, Moldova and Kyrgyzstan are at a stage of economic policy reform comparable to the lagging countries of Central Europe (e.g., Romania, Bulgaria), and the rest lag far behind. Inflation in the NIS remains very high -- 189%, on average, in 1995. Fifty-five percent of the NIS economy is still generated by the public sector, while investment levels remain negligible and fiscal deficits remain far too high.
![[Economic Restructuring and Democracy in ENI Countries]](fig3.gif)
It is hard to generalize about democratic reform in the NIS countries. There are notable success stories in terms of the number of elections held, the degree of NGO development and a flourishing independent media. In contrast, however, there is retrogression which USAID will monitor. For example, the undermining of parliamentary independence by the Executive in Belarus, a repressive regime in Turkmenistan, and the disputed Fall 1996 elections in Armenia raise the question as to whether political and civil rights have improved everywhere since the dissolution of the Soviet Union. Some social trends are also troubling, indicating that reform has not yet gone far enough. Some of the NIS countries -- most notably Russia -- are now experiencing income inequalities comparable to Latin American levels. Although this may be attributable, in part, to wealth creation among a few, poverty has also increased significantly. While five countries in the NIS witnessed an increase in life expectancy since 1991, on balance, the region experienced a decrease. Life expectancy amongRussian males has plummeted -- from 64 years in 1989 to 59 in 1993 and possibly as low as 57 today. In addition, six countries in the region have experienced an increase in infant mortality since 1991. It is important that the fall of communism, and the new democratic and free enterprise systems that followed, not be equated with reduced quality of life.
The security of the United States and the rest of the world is immeasurably enhanced if Russia and the other NIS countries are stable democracies participating in the global economy. For this reason, the United States must stay engaged in the NIS countries visibly and materially to help ensure that fundamental democratic and market institutions take root. In addition to the ongoing technical assistance program -- which is focused on fundamental economic and democratic reform -- the Administration is proposing a Partnership for Freedom initiative, focused on trade and investment and long-term cooperative activities, beginning in FY 1998. While ongoing assistance activities will continue to help put in place the basic laws, regulations and systems needed for market-oriented democracies to function, new emphasis will support mutually beneficial relationships -- such as partnerships, exchanges, joint ventures, endowments and cooperative projects -- directed toward leveraging additional private, governmental and community resources for investment in the transition. The additional resources of the Partnership for Freedom will be concentrated initially on those NIS countries that have come the furthest in accomplishing their economic and political transitions and are ready for trade, investment, rapid growth, and a multitude of economic, political, and cultural ties to the West. At the same time, the base program of NIS technical assistance will continue to focus on those countries that have shown a willingness to undertake reform but have not substantially completed their transitions.
Resource Allocation Trends
FY 1996 saw a significant decrease in Russia's portion of NIS assistance resources, and a sharp increase in funding for Ukraine and Armenia -- as directed by the Congress -- and this continued in FY 1997. While a gradual reduction in Russia's share of the budget had already begun, due to satisfactory progress on many of the reforms implemented in that country, events of the past year suggest that the successful completion of Russia's transition cannot be taken for granted. Last summer's presidential election was, in the end, encouraging; nevertheless, some 40% of the Russian people voted against reform. Nostalgia for the Soviet system will continue to grow so long as average Russians feel that they have lost ground since its fall. Accordingly, the Administration's budget request would restore Russia's share of the budget from 15% in FY 1997 to 27% in FY 1998 in order to allow timely completion of technical assistance for fundamental economic and democratic reforms and to begin new programs to expand trade and investment and other ties with the United States.
Proposed funding for Ukraine and Armenia will remain substantial. FY 1998 funding, in combination with ongoing activities, will be sufficient to continue all the major reform efforts underway as well as the ongoing programs to improve the safety of Ukraine's nuclear power generation. Significant resources are also planned for reformers like Moldova and Kyrgyzstan and strategically important countries like Kazakstan.
The country levels for Central Europe represent a continued shift in the proportion of resources devoted to the southern tier. Approximately $232 million (including $6.5 million in P.L. 480 Title II) is provided for Bosnia in FY 1998 to meet U.S. Government commitments to economic reconstruction. Increased resources in the southern tier are necessary to take advantage of the opportunity for genuine economic reform in Romania, to catalyze reform at the local level in Bulgaria, to help FYR Macedonia accelerate reform now that economic sanctions have been removed, and to deepen democratic institutions in Albania. Resources are also needed to assist in the peaceful reintegration of the Eastern Slavonia region of Croatia. Bosnia will account for almost 46% of the SEED budget under the Administration's request for FY 1998. Forty-eight percent of the non-Bosnia SEED budget is allocated to southern tier countries in FY 1998, up from 45% in FY 1997 and 35% in FY 1996, while the northern tier shareis reduced to 21% in FY 1998, from 30% in FY 1997 and 36% in FY 1996. The remainder is allocated regionally.
Closing Out USAID Programs
As reform results are achieved and these countries enter into more normal trade and security relationships, USAID assistance and field offices will be closed out. This process is already underway in Central Europe. In FY 1996, Estonia was the first country to be graduated from USAID assistance, and USAID assistance to the Czech Republic and Slovenia will end in FY 1997. During the next few years, USAID anticipates additional states in Central Europe will move to graduation, such as Hungary, Latvia, Lithuania, Poland, Slovakia and possibly Croatia. Although Latvia was originally scheduled for an early close-out, slower economic reform and weaker performance than anticipated has led USAID to continue a modest assistance level and to delay Latvia's graduation date. On the NIS side, no country is scheduled for graduation before the end of the decade.Donor Coordination
USAID has been able both to coordinate donor efforts and to leverage hundreds of millions of dollars, beyond its own contributions, for the region. USAID coordinates its activities with the World Bank, the European Bank for Reconstruction and Development (EBRD), and the European Union's (EU) technical assistance programs for the NIS and Europe, as well as through the recently launched Transatlantic Initiative with the EU.USAID's technical assistance often has set the stage for World Bank and EBRD work in energy, housing, infrastructure, and social sector restructuring loans. For example, USAID and the World Bank are in the process of implementing several programs in Russia, including a Gas Distribution Rehabilitation and Energy Efficiency Loan I ($106 million) and a Medical Equipment Loan totaling $300 million. USAID/EBRD collaboration with the Enterprise Funds continues. USAID recently signed two $1 million grant agreements to implement Venture Capital investment activities in Slovenia via the Slovenian Development Capital Fund and the Horizonte Slovene Enterprise Fund. In Fall 1996, USAID and EBRD approved the creation of the Hungarian Equity Partners by the Hungarian American Enterprise Fund.
In Bosnia-Herzegovina, the international community is working closely on all aspects of economic recovery, in full coordination with the North Atlantic Treaty Organization (NATO) Stabilization Force (SFOR) mission. The U.S. contribution is expected to be 20% of the total World Bank estimate of bilateral aid needs, while the European Union and its member states continue to contribute the lion's share of these needs. Through regular meetings of the Steering Board of the Peace Implementation Conference, semi-annual convening of the full Peace Implementation Conference, and daily cooperation with the High Representative and World Bank representatives, the United States and its partners seek to streamline the coordination of civilian program implementation.
External Debt
At the end of 1994, the total debt stock in Central Europe and the NIS was an estimated $216.6 billion. In 1991, under the terms of the so-called zero-option agreement, Russia assumed full responsibilities for all foreign assets and debts of the defunct Soviet Union. Excluding Russia, the total debt stock of the former Soviet republics (includes the Baltic States) grew from about $1 billion in 1992 to $15 billion in 1994. In 1995, debt averaged an estimated 20% of GDP for this group of countries, but ranged widely from a high of 80% of GDP in Moldova to 1% of GDP in Turkmenistan. Russia's debt was an estimated 31% of GDP. In Central Europe, excluding the Baltic countries, total debt stock rose from $82.7 billion in 1989 to $107 billion in 1994.Over the past few years, debt restructuring agreements reached with official and commercial creditors have reduced the debt burden appreciably for a number of states. Those countries concluding agreements were Albania, Bulgaria, Poland, Croatia, the Former Yugoslav Republic of Macedonia, Slovenia, and Russia. While the level of debt for most countries continued to be modest through 1995, many have significantly increased external borrowing since beginning market reforms. Net energy importers in the NIS have also rapidly accumulated debt on supplies of oil and gas obtained from Russia and Turkmenistan. Given the large investment needs of the transition countries, increased borrowing from official and private sources is to be expected. Of particular concern, however, is whether debt will be used to finance needed investment or for domestic consumption. If public and private debt is not used effectively for investment purposes, then over time the risk of balance-of-payments difficulties is increased.
Although many countries have moved toward removing obstacles to foreign direct investment (FDI), only a handful have acquired the lion's share of these non-debt creating capital flows. Regionally, FDI flows almost doubled in 1995, rising 82% to $12.2 billion. This represented by far the highest level of FDI in any year since the beginning of the transition. Hungary led the way with $4.5 billion, followed by the Czech Republic and Russia with $2.5 billion and $1.5 billion, respectively.
FY 1998 Program
The first two strategic goals of USAID's program in the region, economic restructuring and democratic transitions, reflect U.S. national interest in the development of stable, market-oriented democracies. The third goal, social stabilization, recognizes that social pain, including deteriorating social services, can undermine reform efforts and become an obstacle to comprehensive economic and political reform. A new goal of economic growth will apply to the NIS in FY 1998 for those countries that have substantially accomplished their economic restructuring, particularly Russia.While economic restructuring efforts continue to constitute the majority of the program, USAID is planning an increase in democracy programs in the Central Europe region over the next two years. Efforts to increase citizen participation, establish the rule of law, and strengthen local government will be given higher priority; the share of budget resources devoted to democracy programs in the country budgets will rise from roughly 22% in FY 1997 to about 27% in FY 1998. A significant refocusing of efforts toward democracy programs, where progress is still fragile, is being undertaken in Slovakia, Albania, Bulgaria and Romania.
In both Central Europe and the New Independent States, there is an increasing emphasis on local level approaches, through NGOs, local government, and small and medium enterprises. In Bulgaria, Hungary, Poland, Russia and the Central Asian republics, USAID is focusing resources on a bottom-up approach as a means of deepening democratic commitment and strengthening decentralization. In Kazakstan, Kyrgyzstan and Uzbekistan, there has been a strong shift toward NGO development. In some cases, such as Bulgaria, the local level approach was developed in response to lackluster reform performanceat the national level. In other cases, this trend represents the need to help consolidate reform efforts at the local level and push transition beyond the capital city, as is the case in Poland and Hungary. All of these efforts reinforce the Agency's New Partnerships Initiative.
Economic Restructuring and Economic Growth
USAID proposes $98,842,000 for SEED and $474,686,000 for FSA funds under these strategic goals to (a) foster the emergence of a competitive, market-oriented economy in which the majority of economic resources is privately owned and managed, and (b) promote growth of restructured NIS economies through trade and investment and other ties to the West.To achieve the economic restructuring goal, USAID first undertakes activities aimed at systemic reform - laws, policies, institutions, information flows - which are fundamental to free enterprise and private markets. These include legal and regulatory reforms to facilitate privatization; capital market development; improved realignment of revenue policies and budget allocation with economic objectives; modernization of tax codes and systems; establishment of commercial law and regulatory procedures; contract law, demonopolization and bankruptcy; development of small and medium-sized enterprises; establishment of efficient, well-regulated private banking operations; and energy conservation and restructuring of energy pricing and delivery systems.
Specific strategic objectives are: increased transfer of state-owned assets to the private sector; sound fiscal policies and fiscal management practices; accelerated development and growth of private enterprises; a more competitive and market-responsive private financial sector; and a more economically sound and environmentally sustainable energy system.
To achieve the economic growth goal, beginning in FY 1998, emphasis in the NIS will be placed on promoting increased trade and investment, particularly in Russia, and on implementing assistance activities through a more mature set of mechanisms, such as partnerships and cooperative projects. Funds will be provided to establish a Trade and Investment Facility to promote U.S. and other investment necessary for growth, and to support businesses' efforts to expand U.S.-NIS trade. Russia and Ukraine will be major participants.
Democratic Transition
USAID proposes $73,036,000 for SEED and $139,750,000 for FSA funds under this strategic goal to support the transition to transparent and accountable governance and the empowerment of citizens through democratic political processes and freedom of information.To achieve this goal, systemic change to facilitate participation, information flows and the rule of law are key. Among the activities USAID supports are: strengthening of political parties and support of free and fair elections; development of independent, responsible media; strengthening of parliamentary processes and establishment of laws and regulations to enhance local government authority; and development of an independent judiciary to allow changes in legal procedures and the capacity of judicial systems to operate independently and effectively. USAID helps strengthen thousands of NGOs which now serve advocacy functions for ordinary citizens and help open up the political process. FY 1998 funding will build on these efforts and include support for selected foundations, community-based exchanges and sister city partnerships, increased number of cooperative activities focused on anti-crime and law enforcement issues, including economic crimes, and targeted support to community institutions. As part of the Partnership for Freedom, funds will be provided to make change permanent by endowing key U.S. and NIS institutions and activities.
Specific strategic objectives are: increased, better-informed citizens' participation in political and economic decision-making; legal systems that better support democratic processes and market reforms; and more effective, responsive, and accountable local government.
Social Stabilization
USAID proposes $249,730,000 for SEED and $87,139,000 for FSA funds under this strategic goal to respond to humanitarian crises and strengthen the capacity to manage the human dimension of the transition to democracy. Funding for economic reconstruction and other activities in Bosnia comprises almost 90% of the SEED request under this goal for FY 1998.This goal aims to help governments address the problem of deteriorating services and contain the "backlash" against economic reform. USAID provides targeted technical assistance to reform social protection systems. Rather than universal, but unaffordable subsidies for a wide range of services, countries are moving to fee-based systems for those who can afford to pay, coupled with targeted subsidies for the most vulnerable groups. Reforms which develop incentives for an enlarged private sector role in service delivery and financing also will reduce the public burden.
The reduction of conflict in the Caucasus, the Balkans and Tajikistan has permitted USAID to plan the reorientation of assistance resources away from humanitarian assistance toward the first two strategic goals. More emphasis will be placed on economic restructuring and reconstruction assistance which will address the longer-term development needs of these countries. In addition to emergency relief, activities pursued by USAID under the social stabilization goal include increasing reliance on alternative modes of health care provision and financing, moving to market-based rents and maintenance systems for housing; and improving the operational safety at nuclear power plants and the effectiveness of nuclear regulatory bodies.
The goal of the U.S. assistance program in Bosnia is to establish a stable post-war state with a functioning free-market economy and democratic government. Four years of war have ravaged that country's infrastructure and a large international reconstruction effort coordinated by the World Bank and the European Union is underway. To help stabilize the economic, political and social environment for Bosnians, FY 1998 funding will build on the U.S. commitment to revitalize the economy, develop the private sector, and expand employment opportunities. Democracy-building and reconciliation activities will focus on strengthening civil society by supporting independent media and moderate political parties as well as enabling NGO development. In addition, funding for local government capacity- building and the strengthening of judicial institutions will support recently elected governmental bodies and new government institutions.
Specific strategic objectives are: reduced human suffering and crisis impact, improved sustainability of social benefits and services, and reduced environmental risks to public health.
Cross-cutting and Special Initiatives
USAID proposes $70,392,000 for SEED and $198,425,000 for FSA funds under cross-cutting and special initiatives for the following types of programs: (1) activities that do not contribute directly to the strategic objectives, but nevertheless serve strong U.S. interests or address an extraordinary circumstance requiring USAID assistance in a particular country; (2) activities that are too limited in scope or impact to be designated a strategic objective in the country program; and (3) cross-cutting activities that contribute to more than one strategic objective. An example of a cross-cutting effort is USAID's work with the Eurasia Foundation which provides small grants to grass-roots organizations under both the economic restructuring and democracy rubrics. Another example is USAID's Russian Far East program which not only provides assistance to the economically critical forestry sector, but also strengthens regional government capacity and public participation while helping to meet global biodiversity goals. In those instances where activities implemented by other U.S. agencies do not directly support USAID strategic objectives, they are included under this rubric (e.g. Peace Corps, U.S. Information Agency, State Department Science Centers program, etc.).Economic Support Funds, Development Assistance Funds and P.L. 480 Funds
The Administration proposes $84,600,000 for Economic Support Funds (ESF), $4,000,000 for Development Assistance (DA) and $11,407,000 for P.L. 480 Title II funds. Of these amounts the Administration requests $50,000,000 in ESF and $4,000,000 in DA for Turkey; $19,600,000 in ESF for Ireland; $15,000,000 in ESF for Cyprus; $6,569,000 in P.L. 480 Title II for Bosnia; and $4,838,000 in P.L. 480 Title II for NIS Regional activities.In Turkey, the ESF funds are used primarily to enable Turkey to continue servicing its large debt while advancing its economic reform and structural adjustment efforts. The DA funding supports U.S. and indigenous NGO efforts to improve women's health through improved family planning.
In Northern Ireland and the Republic of Ireland, ESF will be used to contribute to the International Fund for Ireland to support the Northern Ireland peace process. Economic assistance at the community level has been identified as the most effective means to break the cycle of violence. The objectives of the Fund are to promote economic and social advancement and to encourage contact, dialogue, and reconciliation between Nationalists and Unionists. The Fund seeks to reach these objectives by supporting and promoting social reconciliation through economic development in Ireland and Northern Ireland, with priority given to new investments that create jobs and reconstruct disadvantaged areas.
In Cyprus, ESF will be used to support bi-communal activities in sectors such as sanitation, rehabilitation of the handicapped; forestry; animal disease and pest control; environmental protection; health; water; and education. Funds will also be used to provide academic training at U.S. institutions for students working towards undergraduate and graduate degrees, as well as short-term professional training and bi-communal training in conflict resolution and business management.
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